The Divergence Between Bitcoin and Equities
The correlation between the price of bitcoin and equities is expected to continue diverging in the coming months. This is due to the Federal Reserve’s recent emphasis on “higher rates for longer,” according to an analyst. In a speech, Fed officials warned about the possibility of further interest rate increases and prolonged restrictive levels. However, this tightening monetary policy is seen as positive for bitcoin, as it encourages the digital asset to establish its own trajectory.
CoinShares Head of Research James Butterfill stated that higher rates for longer are likely to benefit bitcoin but have a negative impact on equities, resulting in a squeeze on corporate margins. He believes that conditions are emerging that will cause the correlation between bitcoin and equities to continue diverging over the next few months or even years.
Recession Signals and Monetary Policies
In an environment where the Fed’s monetary policies are being questioned, the analyst sees bitcoin benefiting. If the market perceives that higher rates indicate a policy error by the Fed, it may start questioning whether bitcoin’s sound monetary policies are superior. However, recession signals such as credit delinquencies and weak PMI readings could eventually lead to a rate cut. Even in this scenario, Butterfill views it as negative for equities.
Market Conditions and Ether Underperformance
Early trading on Wednesday saw stocks facing challenging conditions, with major indices edging lower while the dollar reached a 10-month high. Bitcoin, on the other hand, experienced a 0.5% increase in value to $26,250. Meanwhile, an analysis report highlighted significant underperformance of ether compared to bitcoin. The report attributed this dynamic to an increase in net supply issuance of ether, which resulted from a decline in transaction throughput and gas fees on the Ethereum network. As a result, the price of ether has been negatively affected relative to bitcoin.
Hot Take: Bitcoin and Equities Diverging as Fed’s Monetary Tightening Continues
The correlation between bitcoin and equities is expected to continue diverging in the coming months or even years due to the Federal Reserve’s emphasis on “higher rates for longer.” This tightening monetary policy, while potentially negative for equities, is seen as positive for bitcoin. The market may perceive the Fed’s higher rates as a policy error, which could raise questions about the sound monetary policies of bitcoin versus the central bank. Additionally, recession signals and potential rate cuts are viewed as unfavorable for equities. Overall, these factors suggest that bitcoin will forge its own path separate from traditional equities as the Fed’s monetary tightening continues.
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